Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Supplier Diversity to Cut Costs 16 Percent
Transcript
- Lucas: So we get a lot of questions from buyers who say, 'Look, I want to do supplier diversity, but my CFO tells me it costs more.' And I think that's a fair instinct — you bring in a smaller or newer supplier, you assume you'll pay a premium or deal with more friction. Luna: Right, and that's the conventional wisdom — diversity as a cost of doing business, a compliance line item. Lucas: Exactly. But there's a really interesting counterexample from a mid-size manufacturer I spoke with — let's call them Allied Components. They make industrial fasteners and fittings, about four hundred million in revenue. And they decided to take supplier diversity seriously, but not just as a box to check. They wanted to see if they could actually save money. Luna: And did they? Lucas: They did. Over eighteen months, they reduced total procurement costs by sixteen percent while increasing their diverse supplier spend from about three percent to twenty-two percent of total. And the CFO, who was initially the biggest skeptic, ended up being the program's biggest champion. Luna: How did they pull that off? Because that goes against everything we hear about economies of scale with big suppliers. Lucas: The key was that they didn't just set a percentage goal and go find diverse suppliers to replace existing ones. They started by analyzing their Tier 2 spending — that is, the suppliers their suppliers were using. And what they found was that they were already indirectly buying from a lot of diverse businesses, but through a middleman who was marking everything up. Luna: So they were paying a premium for the diversity without getting the credit or the cost benefit. Lucas: Exactly. One example: they were buying packaging materials from a large national distributor. That distributor was sourcing from a woman-owned box manufacturer. Allied was paying the distributor's margin, which was about twenty-three percent on that line. When they went directly to the woman-owned manufacturer, they cut that margin out and saved twelve percent on packaging costs. Luna: And that's a pretty straightforward win — disintermediation. But I imagine not every category was that simple. Lucas: No, and they had to get creative in some areas. For instance, in metal stampings — a core category — they had been using a single Tier 1 supplier for years. That supplier was reliable but not particularly cost-competitive. Allied's sourcing team identified three certified minority-owned metal stamping shops that had the capability but hadn't been considered because they didn't have the same brand recognition. Luna: And the quality was there? Lucas: Yes, after an audit process. And here's the interesting part: when Allied went back to their incumbent supplier with the competitive quotes from these diverse suppliers, the incumbent immediately dropped their price by nine percent to keep the business. So even in cases where they didn't switch, the mere threat of competition from diverse suppliers drove savings. Luna: That's a great point — diversity as a competitive lever, not just a sourcing goal. Lucas: Right. And the CFO loved that because it meant they were getting cost concessions without any supply disruption. But the team also had to build a measurement framework. They created a simple supplier scorecard that tracked four things: total cost, delivery performance, quality, and diversity spend. And they weighted cost at forty percent and diversity at twenty percent. Luna: So diversity wasn't the only factor, but it was a meaningful one. That probably made it easier for buyers to justify. Lucas: Exactly. They also set a rule that for any sourcing event over a hundred thousand dollars, they had to include at least one certified diverse supplier in the bid process. That forced the team to go out and find qualified suppliers, which they hadn't been doing systematically. Luna: And did they find enough qualified suppliers? I think that's the other fear — that there aren't enough diverse suppliers with the capacity. Lucas: That was a concern early on. But they partnered with a couple of supplier diversity organizations — the National Minority Supplier Development Council and the Women's Business Enterprise National Council — and used their databases. They also attended a few matchmaking events. Within six months they had a pipeline of over forty qualified suppliers across different categories. Luna: So it was more about effort than availability. Lucas: Exactly. And they found that many of these smaller suppliers were more nimble — they could turn around prototypes faster, they were more willing to negotiate on payment terms. One supplier even offered net sixty terms when the incumbent was on net thirty, which improved Allied's cash conversion cycle. Luna: I want to come back to the cash flow piece because that's an underappreciated benefit. But first — what about the cost to onboard all these new suppliers? Qualification, audits, integration — that's not free. Lucas: It's not. Allied estimated they spent about two hundred thousand dollars over the first year on supplier audits, training, and system integration. But they saved over one point two million dollars in total procurement costs in that same period. So the return was immediate. And the second year, the onboarding costs dropped to basically zero because they had already built the pipeline. Luna: Six to one return in the first year — that's a conversation any CFO would listen to. Lucas: Exactly. And that's why the CFO became a champion. He started asking every category manager, 'Why aren't we including diverse suppliers in this bid?' It flipped from a compliance push to a cost-saving initiative. Luna: So what's the one takeaway for a procurement team that wants to try this but doesn't know where to start? Lucas: I'd say start with Tier 2 analysis. Look at what your current suppliers are buying on your behalf, and identify where you're paying a markup for something a diverse supplier could provide directly. That's the lowest-hanging fruit. Luna: That makes sense. And it also gives you a ready-made list of potential suppliers who already know your specifications. Lucas: Right. From there, set a concrete inclusion rule — like one diverse bid per event — and build a simple scorecard that balances cost and diversity. Don't overcomplicate it. And give it at least twelve months to see the full effect. Luna: You know, it's funny — when we talk about cost cutting on this show, it's usually about squeezing existing suppliers or automating processes. But this is a lens that can actually expand your options while reducing costs. Lucas: And it aligns with what a lot of companies' stated values are anyway. The difference here is doing it as a procurement strategy rather than a PR move. If today's episode moved your thinking forward in some small way — maybe you're thinking about running a Tier 2 analysis yourself — you know where to find us. It's buy me a coffee dot com slash fexingo. That's what keeps the show ad-free and independent. Luna: Yeah, and we really appreciate that. It allows us to dig into cases like this without any sponsor influence. Lucas: So back to the numbers: Allied Components didn't just cut costs. They also improved on-time delivery by about seven percent across the board, because the diverse suppliers they brought in were often more responsive and geographically closer to their plants. Luna: That's the kind of win-win that makes you wonder why more companies aren't doing this. Lucas: I think it's inertia. And the assumption that diverse means expensive. But the data from this case — and I've seen similar results from a few other companies — suggests that when you approach it strategically, it can actually be a net positive for the bottom line. Luna: Are there any categories where it didn't work for Allied? Lucas: They struggled in highly specialized technical components — like custom-molded plastics with tight tolerances. The pool of certified diverse suppliers with that specific capability was very small, and the ones they found weren't cost-competitive. So they kept that category with their incumbent. But that was maybe five percent of spend. Luna: So it's not a silver bullet, but it's a meaningful tool for the majority of categories. Lucas: Exactly. And even in those tough categories, they're now working with their incumbent to help them mentor a diverse supplier to eventually build that capability. That's a longer play, but it's on the radar. Luna: That's a nice note to end on — using your existing supply base to help build the pipeline. Lucas: Yeah, I think that's where procurement is heading. It's not just about buying stuff. It's about building a supply ecosystem that's both cost-effective and resilient. And supplier diversity, done right, is part of that.